Health Insurance, Risk, and Responsibility after the Patient Protection and Affordable Care Act

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1 University of Pennsylvania Law School Penn Law: Legal Scholarship Repository Faculty Scholarship Health Insurance, Risk, and Responsibility after the Patient Protection and Affordable Care Act Tom Baker Follow this and additional works at: Part of the Community Health and Preventive Medicine Commons, Health Economics Commons, Health Law Commons, Health Services Administration Commons, Insurance Commons, Insurance Law Commons, and the Public Economics Commons Recommended Citation Baker, Tom, "Health Insurance, Risk, and Responsibility after the Patient Protection and Affordable Care Act" (2011). Faculty Scholarship. Paper This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact

2 University of Pennsylvania Law Review Founded 1852 Formerly American Law Register VOL. 159 JUNE 2011 NO. 6 ARTICLE HEALTH INSURANCE, RISK, AND RESPONSIBILITY AFTER THE PATIENT PROTECTION AND AFFORDABLE CARE ACT TOM BAKER The Affordable Care Act embodies a new social contract of health care solidarity through private ownership, markets, choice, and individual responsibility, with government as the insurer for the elderly and the poor. The new health care social contract reflects a fair share approach to health care financing. This approach largely rejects the actuarial fairness vision of what constitutes a fair share while pointing toward a new responsibility to be as healthy as you can. This new responsibility reflects the influence of health economics and William Maul Measey Professor of Law and Health Sciences, University of Pennsylvania Law School. Thank you to Deborah Hellman, Kristin Madison, Amy Monahan, Dan Schwarcz, and the students in my health insurance regulation seminar for helpful conversation; Robert Ahdieh, Abbe Gluck, Allison Hoffman, and David Hyman for comments; and Bill Draper for research assistance. This Article benefited from an early presentation as the Hawley Lecture at the University of Iowa College of Law and from the faculty workshop at Emory Law School. Research for this Article was supported by a grant from the Alfred P. Sloan Foundation. (1577)

3 1578 University of Pennsylvania Law Review [Vol. 159: 1577 health ethics. There are challenges to achieving the solidarity through individual responsibility envisioned in the Act most significantly risk classification by design and non-compliance with the mandates but the Act contains regulatory tools that the states, the new Exchanges, and the Department of Health and Human Services can use to address these challenges. This Article provides a high level overview of the distribution of health insurance risk and responsibility after the Affordable Care Act and describes how the Act reforms the key institutions that perform that distribution: Medicare, Medicaid, the large-group health insurance market, and the individual and small-group health insurance market. INTRODUCTION I. DISTRIBUTING HEALTH CARE RISK: THE FOUR-LEGGED STOOL A. Medicare B. Medicaid C. The Individual and Small-Group Market D. The Large-Group Market II. DISTRIBUTING RISK AND RESPONSIBILITY AFTER THE AFFORDABLE CARE ACT A. The Fair Share Approach to Responsibility for the Cost of Health Care B. The Responsibility to Be as Healthy as You Can III. CHALLENGES TO THE NEW HEALTH CARE SOCIAL CONTRACT A. Risk Classification by Design The Minimum Coverage Requirements The Exchange Certification Requirement The Medical-Loss Ratio Requirements The Risk Adjustments B. Noncompliance with the Mandates The Penalties Are Better Powered than Many People Realize The Exchanges Can Tolerate Noncompliance CONCLUSION: THE MORAL OPPORTUNITY OF INSURANCE INTRODUCTION With the passage of the Patient Protection and Affordable Care Act (PPACA) 1 and the Health Care and Education Reconciliation Act 1 Pub. L. No , 124 Stat. 119 (2010) (to be codified as amended in scattered sections of 21, 25, 26, 29, and 42 U.S.C.).

4 2011] Health Insurance, Risk, and Responsibility 1579 of 2010 (HCERA), 2 health insurance in the United States is on track to become a form of social insurance. While all insurance is social so that the loss lighteth rather easily upon many than heavily upon few 3 to be considered social insurance in the traditional sense, the insurance must be compulsory and easily available, and the price must bear some relation to the ability to pay. 4 Parts of the U.S. health insurance system already meet those requirements: most significantly Medicare (for the elderly and formerly working disabled); Medicaid (for certain categories of the poor, including all children in low income families); and workers compensation (for employment-related illness and injury). 5 U.S. income tax and employment law strongly encourage the provision of general health benefits through employment, making employment-based health insurance a de facto obligation for most large employers and many small employers. 6 But the legal choice to offer health insurance remains that of the employer, and individuals only health insurance obligations are to pay Medicare taxes and to participate in the financing of Medicaid through the payment of their ordinary state and federal taxes. The Affordable Care Act will make large employers obligations de jure starting in 2014, and it will create a legal obligation to obtain health insurance for employees entire lifetime, not just for old age or in the event of total disability. The Affordable Care Act embodies a social contract of health care solidarity through private ownership, markets, choice, and individual responsibility. While some might regard this contract as the unnatural union of opposites solidarity on the one hand and markets, choice, and individual responsibility on the other those familiar with insurance history will recognize in the Act an effort to realize the dream of America s early insurance evangelists: a society united on 2 Health Care and Education Reconciliation Act of 2010, Pub. L. No , 124 Stat (to be codified in scattered sections of 20, 26, and 42 U.S.C.). 3 An Act Concerning Matters of Assurances Used Among Merchants, 1601, 43 Eliz., c. 12, pmbl. (Eng.). 4 See I.M. RUBINOW, SOCIAL INSURANCE 3 (1913) ( [S]ocial insurance is the policy of organized society to furnish that protection to one part of the population, which some other part may need less, or, if needing, is able to purchase voluntarily through private insurance. ). 5 See infra Part I. 6 See Alain C. Enthoven & Victor R. Fuchs, Employment-Based Health Insurance: Past, Present, and Future, HEALTH AFF., Nov. Dec. 2006, at 1538, (explaining that [t]he exemption of employer payments for health insurance from employees taxable income, combined with substantial efficiency advantages of group over individual insurance has led to the prominence of employment-based insurance).

5 1580 University of Pennsylvania Law Review [Vol. 159: 1577 the basis of mutual insurance. 7 Public ownership and pure, tax-based financing are technically easier and almost certainly cheaper routes to health care solidarity, but they come at a cost to the status quo that Congress was not prepared to pay. This Article explores the contours of the solidarity and individual responsibility embodied in the Act. Part I explains the four main health care financing and risk distribution institutions reflected in the Act Medicare, Medicaid, the individual and small employer market, and the large-group market with an emphasis on how the Act changes those institutions and how they are financed. Part II focuses on the distribution of risk and responsibility within and among those institutions. I will argue, first, that the new health care social contract extends the fair-share approach to health care financing while rejecting the actuarial-fairness vision of what constitutes a fair share and, second, that the Act points toward the recognition of a new responsibility to be as healthy as you can. This responsibility reflects the influence of health economics and health ethics, and it is part of the embrace of risk first described in the insurance-as-governance literature. 8 Part III identifies challenges to achieving solidarity through individual responsibility envisioned in the Act most significantly what I will call risk classification by design. Part III also explores the regulatory tools the Acts puts into the hands of the states, the exchanges, and the Department of Health and Human Services (HHS) in order to address these challenges. I. DISTRIBUTING HEALTH CARE RISK: THE FOUR-LEGGED STOOL Since the 1970s, the United States has had three relatively well functioning health care risk distribution mechanisms and one poorly functioning one. The three better-functioning mechanisms are Medicare, Medicaid, and the large-group market. (All three have longterm cost problems, but this is an issue that the Affordable Care Act does not address.) The poorly functioning mechanism is the individual and small-group market. We can think of U.S. health care risk distribution as a wobbly stool. Some people spill things while sitting on it. Others fall off. 7 D.R. Jacques, Society on the Basis of Mutual Life Insurance, 16 MERCHANTS MAG. & COM. REV. 152, 158 (1847). 8 See generally Tom Baker & Jonathan Simon, Embracing Risk (reviewing the line of scholarship that proceed[s] from an implicit belief that risk is a positive force that can be directed toward socially useful ends ), in EMBRACING RISK: THE CHANGING CULTURE OF INSURANCE AND RESPONSIBILITY 1, 20 (Tom Baker & Jonathan Simon eds., 2002).

6 2011] Health Insurance, Risk, and Responsibility 1581 Consistent with this metaphor, the Affordable Care Act makes only incremental changes to Medicare, Medicaid, and the large-group insurance market (though the Medicaid change is historic in terms of U.S. social welfare policy). The Affordable Care Act dramatically reforms the individual and small-group insurance market with the aspiration of stabilizing the four-legged stool. Understanding these changes is a necessary first step to understanding the new health care social contract. I will begin with Medicare and Medicaid, which are the easy parts to explain at the general level. I will then turn to the individual and small-group market, and I finish with the large-group market. A. Medicare The Affordable Care Act made no fundamental changes to Medicare, which is the health insurance component of the Social Security program. Accordingly, health insurance for the eligible disabled (those who paid, or were dependents of someone who paid, Social Security taxes for forty quarters before becoming totally disabled) and seniors (who paid, or were married to someone who paid, Social Security taxes for forty quarters) will continue to consist of four parts: Part A, which covers inpatient care, hospice care, and some home health services 9 and is financed entirely by a flat percentage tax on wages paid over the lifetime; 10 Part B, which covers other medically necessary or preventive services 11 and is funded in part by a flat percentage tax on wages paid over the lifetime (73%) and in part by premiums paid when enrolled (25%), that are based in part on income and are otherwise uniform regardless of age, health status, or any other factors; 12 Part C, Medicare Advantage, which is a private-sector alternative to Parts A and B that allows individuals to obtain their health care benefits, typically including prescription drug benefits, from the health care financing companies 9 Medicare Part A (Hospital Insurance), MEDICARE.GOV, navigation/medicare-basics/medicare-benefits/part-a.aspx (last visited Mar. 15, 2011). 10 PATRICIA A. DAVIS, CONG. RESEARCH SERV., R41436, MEDICARE FINANCING 2-3 (2011). 11 Medicare Part B (Medical Insurance), MEDICARE.GOV, navigation/medicare-basics/medicare-benefits/part-b.aspx (last visited Mar. 15, 2011). 12 DAVIS, supra note 10, at 2 fig.1, 4.

7 1582 University of Pennsylvania Law Review [Vol. 159: 1577 active in the large-group market explained below 13 and is funded in much the same way as parts A, B, and D; 14 and Part D, which covers prescription drugs 15 and is funded by premiums that vary according to the type of plan but are otherwise uniform regardless of age, health status, or any other factors. 16 The Affordable Care Act changes Medicare financing and risk distribution in three main ways: increasing the progressivity of Medicare financing by raising the wage tax on higher-income taxpayers, 17 adding an income-based component to Part D premiums, 18 and freezing the thresholds for income-based increments to Part B premiums; 19 changing the cost-sharing formula for Part D so that individuals will gradually pay a smaller percentage of the costs of medication at the point of sale (meaning that a greater percentage of the costs will be paid in the form of Part D premiums); 20 and 13 Medicare Advantage (Part C), MEDICARE.GOV, navigation/medicare-basics/medicare-benefits/part-c.aspx (last visited Mar. 15, 2011). 14 DAVIS, supra note 10, at What is Part D (Medicare Prescription Drug Coverage)?, MEDICARE.GOV, (last visited Mar. 15, 2011). 16 DAVIS, supra note 10, at The payroll tax on high-income taxpayers will be increased starting in PPACA 9015(a)(1)(A), 26 U.S.C.A. 3101(b)(2) (West Supp. 1A 2010). Highincome taxpayers are those whose wages or self-employment income exceeds $200,000 for individuals or $250,000 for married couples filing jointly. Id. The payroll tax will increase by 0.5% from 1.45% to 1.95% on wages. Id. The increase will be from 2.9% to 3.4% on self-employment income. Id. 9015(b)(1)(A), 26 U.S.C.A. 1401(b). 18 Part D premium subsidies for high-income beneficiaries were reduced beginning in Id. sec. 3308(a)(1), 1860D-13(a)(7), 42 U.S.C.A. 1395w-113(a)(7) (West Supp. 1B 2010). If the modified adjusted gross income (MAGI) of beneficiaries exceeds $80,000 for individuals and $160,000 for couples, 42 U.S.C. 1395r(i)(2) (2006), the monthly amount of the premiums shall be increased by the monthly adjustment amount. PPACA sec. 3308(a)(1), 1860D-13(a)(7), 42 U.S.C.A. 1395w- 113(a)(7). The Commissioner of Social Security is delegated to carry out and disclose necessary income-related increases in the base beneficiary premium. Id. sec. 3308(a)(1), 1860D-13(a)(7)(D), 42 U.S.C.A. 1395w-113(a)(7)(d). 19 The Act freezes the threshold for income-related Medicare Part B premiums for 2011 through Id. sec. 3402(4), 1839(i)(6), 42 U.S.C.A. 1395r(i)(6). 20 See HCERA sec. 1101, 1860D-42(c), 42 U.S.C.A. 1395w-152(c) (providing for rebates of $250 to those who exceeded the Part D initial coverage limit in 2010). In addition, the Act phases down the coinsurance rate to 25% by 2020:

8 2011] Health Insurance, Risk, and Responsibility 1583 reducing federal payments to Medicare Advantage plans, 21 providing bonuses for quality ratings, 22 and obligating these plans to maintain a medical-loss ratio of at least 85%. 23 In addition, the Act expands coverage for preventive health services and eliminates cost sharing for services designated as cost effective by the U.S. Preventive Services Task Force. 24 As I will explain in Part II, this new coverage, if extended along the lines of the parallel aspects of the insurance market reforms in the Act, has the potential to represent a significant change in Medicare s distribution of risk and responsibility. 25 For brand-name drugs, the Act mandates a Medicare gap coverage discount program by no later than January 1, 2011, HCERA sec. 1101(b)(2), 1860D- 14A(a), 42 U.S.C.A 1395w-102(a), which requires manufacturers to provide a 50% discount on the negotiated price, PPACA sec. 3301(b), 1860D- 14A(g)(4)(A), 42 U.S.C.A. 1395w-102(g)(4)(A). This is in addition to federal subsidies providing 25% of the cost by HCERA sec. 1101(b)(3)(C), 1860D-2(b)(2)(D)(ii), 42 U.S.C.A. 1395w-102(b)(2)(D)(ii). For generic drugs, the Act provides federal subsides of 75% of the cost by HCERA sec. 1101, 1860D-2(b)(2)(C)(ii), 42 U.S.C.A. 1395w-102(b)(2)(C)(ii). The Act provides a $250 rebate to Medicare beneficiaries who reach the Part D coverage gap in HCERA sec. 1101(a)(1), 1860D-42(c)(1), 42 U.S.C.A. 1395w-152(c)(1). 21 According to the Medicare Payment Advisory Committee, private Medicare Advantage (MA) plans on average are paid an estimated 13% more per beneficiary than what is paid per beneficiary in traditional Medicare plans. Efforts to Reduce Payments to Medicare Advantage Plans Expected from Obama Administration, Congress, MED. NEWS TO- DAY (Nov. 26, 2008), To deal with the problem of overpayment, the Act calls for substantial changes to the calculation formula. All counties or similar jurisdictions are ranked in order of their average fee-for-service (FFS) spending, regardless of their territory or population. HCRA sec. 1102(b), 1853(n)(1) (2), 42 U.S.C.A 1395w-23(n)(1) (2). The federal payments (MA benchmarks) will be an applicable percentage of a county s average FFS spending, with higher payments (the MA benchmark as 115% of FFS rates) for areas with low FFS spending and lower payments (the MA benchmark as 95% of FFS rates) for areas with high FFS spending. Id. sec. 1102(b), 1853(n)(2)(B), 42 U.S.C.A 1395w-23(n)(2)(B). The new formula will be phased in during the next two to six years and will be fully phased in by Id. sec. 1102(b), 1853(n)(3), 42 U.S.C.A. 1395w-23(n)(3). 22 Beginning in 2010, the MA benchmarks will be increased if the plans receive four or more stars, based on the current five-star quality rating system; qualifying plans in qualifying areas receive double bonuses. Id. 1102(c), 1853(o), 42 U.S.C.A. 1395w-23(o). 23 Id. sec. 1103, 1857(e)(4), 42 U.S.C.A. 1395w-27(e)(4). Beginning in 2014, MA plans that fail to have the minimum medical-loss ratio shall remit partial payments to the Secretary of HHS. Id. The Secretary shall suspend plan enrollment for two years if the medical-loss ratio is less than 85% for three consecutive years and terminate the plan contract if the medical-loss ratio is less than 85% for five consecutive years. Id. 24 PPACA sec. 4003(a), 915, 42 U.S.C.A. 299b-4 (West Supp. 1A 2010). 25 PPACA increases Medicare payments for certain preventive services to 100% of actual charges or fee schedule rates, including preventive services recommended with a grade of A or B by the United States Preventive Services Task Force for any indication or population and are appropriate for the individual. PPACA secs. 4104, 10406,

9 1584 University of Pennsylvania Law Review [Vol. 159: 1577 B. Medicaid In form, the Act changed Medicaid only incrementally, but these changes are very significant in historical terms. The Act, for the first time in U.S. history, explicitly recognizes a national entitlement to health care for all of the poor including able-bodied, working-age individuals to be financed through general tax revenues. The Affordable Care Act thus abandons the concept of the deserving poor that has long been one of the main features of U.S. social welfare policy, including policies on access to health care. 26 Starting in 2014 all lawful U.S. residents with family incomes of less than 133% of the federal poverty level (FPL) will be entitled to Medicaid. 27 Before the Act, Medicaid was available on a national basis only to pregnant women, children, parents of dependent children, and the elderly and disabled. These individuals had to meet state-determined income ceilings that varied by category, though there was a national floor for some categories: 100% of the index for the elderly, disabled, and children aged 7 to 19, and 133% of the index for pregnant women and children 6 years of age or younger. After the Act, states remain free to expand Medicaid coverage beyond the new national floor; thus, categorical differences may persist at the state level. 28 But the new incentive for states to establish basic health programs for individuals with incomes in the range of 133% 200% of the poverty index, 29 together with the economies of scale potentially available from combining these basic programs with Medicaid, creates the possibility for a nearly uniform national entitlement to free health care for individuals in families with incomes up to 200% of the poverty index. Almost all of the new Medicaid costs will be borne by the federal government and paid for out of general reve- 1833(a)(1)(T), 42 U.S.C.A. 1395l(a)(1)(T) (West Supp. 1B 2010). In addition, the Act provides coverage for an annual wellness visit. Id. sec. 4103(a), 1861(s)(2)(FF), 42 U.S.C.A. 1395x(s)(2)(FF). The United States Preventive Services Task Force was created by PPACA sec. 4003(a), 915(a), 42 U.S.C.A 299b-4(a). 26 See generally FRANCES FOX PIVEN & RICHARD A. CLOWARD, REGULATING THE POOR: THE FUNCTIONS OF PUBLIC WELFARE (updated ed. 1993) (emphasizing the longstanding practice in the United States of enforcing the idea of work when providing public relief to the poor). 27 PPACA sec. 2001(a)(1)(C), 1902(a)(10)(A)(i)(VIII), 42 U.S.C.A. 1396a(a)(10)(A)(i)(VIII). 28 See id. sec. 2001(e)(1)(A) (B), 1902(a)(10)(A)(ii), (hh)(1), 42 U.S.C.A. 1396a(a)(10)(A)(ii), (hh)(1) (allowing states to extend coverage to individuals whose income... exceeds 133 percent of the poverty line ). 29 Id. 1331(a)(1), (e)(1)(b), 42 U.S.C.A (a)(1), (e)(1)(b).

10 2011] Health Insurance, Risk, and Responsibility 1585 nues. 30 States that had previously expanded coverage to individuals who are newly eligible nationally will receive federal funds on a phased-in basis so that they will receive the same percentage of assistance as other states by C. The Individual and Small-Group Market The Affordable Care Act makes the most dramatic changes to the individual and small-group insurance market, aiming to create: a single health insurance pool in each state; 32 populated by all lawful residents in the state who do not have health benefits through a government program or a large employer; 33 serviced by health insurance plans that provide all essential health care benefits and compete on the basis of cost and quality; 34 with guaranteed access and identical premiums for all, subject to a few narrowly tailored exceptions that do not include health status. 35 The practical challenges to achieving this goal are addressed in Part III. Here I explain only how the market is supposed to work, in order to identify the explicit choices about the distribution of health care risk and responsibility embodied in the Act. For present purposes, the key elements of the individual and small-group market reforms are the following: the mandates the subsidy minimum coverage requirements open enrollment and guaranteed renewal 30 See HCERA sec. 1201(1)(B), 1905(y)(1), 42 U.S.C.A. 1396d(y)(1) (setting the amount of federal matching funds provided to states for newly eligible individuals at 100% from 2014 through 2016 and decreasing assistance only slightly to 90% by 2020). 31 PPACA sec. 1201(2)(b), 1905(z)(2), 42 U.S.C.A. 1396d(z)(2). 32 Id. 1312(c), 42 U.S.C.A (c). Initially, the Act creates two separate pools in each state the individual pool and the small group pool but states are permitted to combine the pools, a result that is most consistent with the solidarity objectives of the Act and that, I predict, will be administratively easier and less costly in the long run. Id. 1312(c)(3), 42 U.S.C.A (c)(3). This is the reason that I treat the individual and small-group market as a single leg of my metaphorical four-legged stool. 33 Id. 1312(c), 42 U.S.C.A (c). 34 Id. 1302, 42 U.S.C.A Id. sec. 1201(4), 2701(a), 42 U.S.C.A. 300gg(a) (West Supp. 1A 2010).

11 1586 University of Pennsylvania Law Review [Vol. 159: 1577 limits on individual risk-based pricing risk adjustments health exchanges The paragraphs that follow briefly explain each of these elements in order to set the stage for the risk and responsibility analysis. The Mandates. The Act obligates all lawful citizens to obtain minimum essential coverage 36 and all large employers i.e. those with more than 100 employees to start providing minimum essential coverage to their employees in The structure of these mandates makes obtaining coverage through the individual and small-group market the residual health care financing mechanism for people who do not qualify for a government health benefit program (Medicare, Medicaid, and Veterans benefits) or work for a large employer. The individual mandate is an important part of the solidarity equation because it requires everyone to be in the health insurance risk pool, addressing the adverse selection problem that would follow from other provisions of the Act that make it possible for high-risk people to enter the health insurance pool. 38 The Subsidies. The individual mandate obligates individuals to obtain a health plan. The subsidies encourage them to purchase a plan and reduce the likelihood that they will qualify for the hardship exceptions. 39 Beginning in 2014, people with incomes up to 400% of the FPL will be eligible for financial assistance for coverage through the state health insurance exchanges: Those with incomes under 133% of the FPL will be covered under the newly expanded Medicaid program. 40 Those with incomes up to 400% of the FPL will qualify for tax credits to reduce their premiums. 41 They will also qualify for limited cost sharing under their plans to enable them to pay less out of pock- 36 Id. 1501(b), 26 U.S.C.A. 5000A(a). 37 See id. 1304(b)(1), 42 U.S.C.A (b)(1) (West Supp. 1B 2010) (defining large employer under the Act to be those with at least 101 employees ); id. 1513(a), 26 U.S.C.A. 4980H(a)(1) (West Supp. 1A 2010) (penalizing large employers who do not provide minimum essential coverage ). The fact that the minimum essential coverage definition for large employers is almost content free is a challenge to the solidarity goal that I will address in Part III. 38 See infra Section III.A. 39 See HCERA 1002(b)(2), PPACA 1501(b), 26 U.S.C.A. 5000A(e) (exempting from the mandate certain individuals who cannot afford coverage). 40 PPACA sec. 2001(a)(1)(C), 1902(a)(10)(A)(i)(VIII), 42 U.S.C.A. 1396a(a)(10)(A)(i)(VIII) (West Supp. 1B 2010). 41 HCERA 1001(a)(1), 26 U.S.C.A. 36B(b)(3)(A)(i) (West Supp. 1A 2010).

12 2011] Health Insurance, Risk, and Responsibility 1587 et. 42 Both the tax credits and reduction in cost sharing will apply on an income-based sliding scale and similarly will be structured to correspond to the actuarial categories of the plans. 43 General federal revenues will fund the subsidies, which thus represent a major ability-topay component of the new health care social contract. Minimum Essential Coverage Requirements. The minimum essential coverage requirements set a floor for contract quality standards on the health plans that may be offered in the individual and small-group market beginning in These standards have three primary components. First, plans must cover essential health benefits, which are a package of benefits that the HHS Secretary will define. 44 Second, the plan must limit annual cost sharing (e.g., deductibles and coinsurance) to the amount authorized under the Affordable Care Act s Health Savings Accounts (HSAs). 45 In subsequent years, the limitation will be indexed to the annual limit on HSAs for self-only coverage and double that amount for any other plan. 46 Third, the plan must meet one of four actuarial value requirements, which vary by level of coverage (bronze, silver, gold and platinum) and which set a percentage ceiling on the aggregate cost sharing of all the individuals in the plan. 47 The actuarial value of a plan refers to the percentage of the total costs, to be paid by the plan, of covered services provided to all of the plan s participants, in the aggregate. For example, a silver-level plan must have an actuarial value of at least 70%, meaning that it cannot impose aggregate cost sharing of more than 30% of the total cost of covered benefits on the participants in the plan. 48 In addition, the statebased exchanges may have discretion to include additional requirements based on their authority to determine whether making available such [a] health plan through such [an] Exchange is in the interests of quali- 42 PPACA 1402(c)(1)(A), 42 U.S.C.A (c)(1)(A) (West Supp. 1B 2010). 43 See HCERA 1001(a)(1)(C), (b)(1)(a), PPACA 1402(c)(1)(B), 42 U.S.C.A (c)(1)(B) (coordinating reductions with actuarial value limits). 44 Id. 1302(a) (b), 42 U.S.C.A (a) (b). 45 Id. 1302(c)(1)(A), 42 U.S.C.A (c)(1)(A). 46 Id. 1302(c)(1)(B), 42 U.S.C.A (c)(1)(B). 47 Id. 1302(a)(3), 42 U.S.C.A (a)(3). 48 See id. 1302(d)(1)(B), 42 U.S.C.A (d)(1)(B) (defining a silver-level plan as one that covers seventy percent of a policyholder s costs or benefits that are actuarially equivalent to seventy percent of the full actuarial value of the benefits provided under the plan ).

13 1588 University of Pennsylvania Law Review [Vol. 159: 1577 fied individuals and qualified employers in the State or States in which such Exchange operates. 49 These minimum quality standards are designed to ensure that everyone actually receives adequate health care benefits when they fulfill their responsibility to be insured. In addition, by reducing the range of variation among plans, the minimum standards reduce the room for what I call risk classification by design the creation of separate risk pools as individuals self-select into different health care products according to their self-assessed health risk status, or what economists refer to as separating equilibria. 50 I will address risk classification by design, which is one of the most important challenges to the solidarity equation, in Part III. Open Enrollment and Guaranteed Renewal. The open enrollment 51 and guaranteed renewal requirements 52 mean that all health insurance plans in the individual and small-group market must accept everyone who chooses to apply for or renew health insurance. These requirements eliminate the traditional authority of health insurance companies to choose whom they will insure an authority that insurance companies have had no realistic choice to exercise in any way other than to exclude from the health insurance pool those people who most need to be in the pool. 53 It is important to note that making 49 Id. 1311(e)(1)(B), 42 U.S.C.A (e)(1)(B). The Act also contains requirements regarding transparency and quality improvement that the exchanges are to enforce. See, e.g., id 1311(e)(2), 42 U.S.C.A (e)(2) (requiring the exchanges to collect information about premium increases); id. 1311(g), 42 U.S.C.A (g) (requiring periodic reporting to the exchanges of activities by qualified health plans in order to promote health via market-based incentives). States that require plans to provide coverage for health care services that go beyond the essential benefits must pay for the cost of those additional services. Id. 1311(d)(3)(B)(ii), 42 U.S.C.A (d)(3)(B)(ii). 50 As Alma Cohen and Peter Siegelman explain, Since insurers cannot distinguish between high-risk and low-risk agents, the two groups must be offered the same prices for insurance. Given that the two groups face the same prices, their different risks will lead them to act differently. In particular, high-risk agents can be expected to purchase more insurance. Alma Cohen & Peter Siegelman, Testing for Adverse Selection in Insurance Markets, 77 J. RISK & INS. 39, 43 (2010). 51 See PPACA sec. 1201(4), 2702(a) (b)(1), 42 U.S.C.A. 300gg-1(a) (b)(1) (West Supp. 1A 2010) (requiring that every health insurance issuer accept all applicants, but allowing issuers to limit acceptances to certain open or special enrollment periods). 52 See id., 2703(a), 42 U.S.C.A. 300gg-2(a) ( [I]f a health insurance issuer offers health insurance coverage in the individual or group market, the issuer must renew or continue in force such coverage at the option of the plan sponsor or the individual, as applicable. ). 53 See Tom Baker, Containing the Promise of Insurance: Adverse Selection and Risk Classification, 9 CONN. INS. L.J. 371, (2003) (explaining the competitive power of

14 2011] Health Insurance, Risk, and Responsibility 1589 it too easy for high-risk individuals to join the insurance pool actually poses a challenge to the solidarity equation by creating the possibility that people will violate the mandate unless and until they really need serious health treatment. This is yet another challenge that I will address in Part III. Limits on Individual Risk-Based Pricing. In the traditional, actuarial approach to private market insurance, insurance is understood as a series of bilateral contracts between insurance companies and their policyholders, and those contracts are understood as wagers, the odds (and therefore the price) of which should be set according to the likelihood that the policyholder will win by making a claim. 54 If people have the choice whether to buy insurance or not, and if insurance companies have the authority to decide on an individual basis how much to charge for their products, then an insurance company that fails to set prices on this basis will not last long. The result is that those people who most need to be in the pool cannot afford to join the pool because their premiums will be too high. 55 Accordingly, achieving health care solidarity through the private market requires limiting insurers authority to decide on an individual basis how much to charge for their products. The Act allows health plans in the individual and small-group market to vary their prices on the basis of only four factors: whether the applicant is an individual or family, the geographic region in which the applicant lives, age, and tobacco use. 56 For the latter two factors, there are limits on the pricing differentials 3 to 1 for agebased pricing differentials and 1.5 to 1 for tobacco-use pricing differentials meaning that the price for the oldest group in the pool may not be more than three times the price for the youngest group and the price for the heaviest tobacco users may not be more than onerisk classification, which produces a classification arms race, in which insurers either maintain their classification edge or face the loss of low risks to the competition and the migration of the high risks to their insurance rolls ); see also Deborah A. Stone, The Struggle for the Soul of Health Insurance, 18 J. HEALTH POL. POL Y & L. 287, 298 (1993) (noting the common insurance convention that people are [considered] uninsurable for life insurance if their mortality is five or more times the standard mortality ). 54 See Tom Baker, Risk, Insurance, and the Social Construction of Responsibility ( [W]hen it comes to health, disability, property, liability, and term insurance, if your withdrawals equal your deposits, you have, in at least some respects, a very unfortunate life. ), in EMBRACING RISK, supra note 8, at 33, See Stone, supra note 53, at 308 ( The logic and methods of actuarial fairness mean denying insurance to those who most need medical care. ). 56 PPACA sec. 1201, 2701(a)(1)(A), 42 U.S.C.A. 300gg(a)(1)(A).

15 1590 University of Pennsylvania Law Review [Vol. 159: 1577 and-a-half times the price for comparable non-users. 57 In addition, the Act permits the sale of special, high-deductible policies to people under the age of thirty, and, presumably, these policies will constitute a separate risk pool. 58 (Such policies represent an example of risk classification by design explicitly permitted in the Act.) Finally, the Act authorizes wellness programs for small employer plans that may provide substantial rebates or other benefits to participants (up to 30% of the total premium, including the employer share, and potentially increasing to 50% at the discretion of the Secretaries of Labor, Health and Human Services, or the Treasury). 59 The wellness programs have the potential to lead to de facto differential prices based on participation in the programs, but the programs may not be a subterfuge for discriminating based on a health status factor. 60 From a risk and responsibility perspective, these pricing factors and the wellness programs are among the most interesting aspects of the Act, as discussed shortly. Risk Adjustments. Risk adjustments are financial transfers among health plans based on the aggregate risk of the individuals who choose to participate in each plan. 61 Plans that end up with a disproportionately high-risk membership are supposed to receive risk adjustment payments from plans that end up with a disproportionately low-risk membership so that the price that individuals pay for their insurance does not depend on their health risk, whether it is due to risk classification by design or to other sorting mechanisms that correlate with risk. 62 The Exchanges. The exchanges are the marketplace through which individuals and small groups will purchase health care plans. Among other responsibilities, the exchanges must ensure that the plans listed 57 Id. 58 See id. 1302(e)(2)(A), 42 U.S.C.A (e)(2)(A) (West Supp. 1B 2010) (defining eligibility for certain catastrophic coverage plans as extending to those under the age of thirty). 59 Id. sec. 1201(4), 2705(j)(3)(A), 42 U.S.C.A. 300gg-4(j)(3)(A) (West Supp. 1A 2010). 60 Id., 2705(j)(3)(B), 42 U.S.C.A. 2705(j)(3)(B) (West Supp. 1B 2010). While the Act warns against misuse, it does not establish criteria for how states should evaluate when wellness programs amount to subterfuge. Id. 61 See id. 1343(a), 42 U.S.C.A (a) (creating a state-based risk adjustment mechanism for plans in the individual and small-group market). For a recent empirical study of the importance of risk adjustment to redressing classification by design, see Karen Eggleston & Anupa Bir, Measuring Selection Incentives in Managed Care: Evidence from the Massachusetts State Employee Insurance Program, 76 J. RISK & INS. 159, (2009). 62 PPACA 1343(a), 42 U.S.C.A (a).

16 2011] Health Insurance, Risk, and Responsibility 1591 on it comply with statutory requirements. 63 The exchanges are also likely to be asked to administer the risk adjustments. 64 Important, unanswered questions about the exchanges include how active exchanges should be in helping consumers make choices and whether states should exercise the option of allowing the federal government to create and operate the exchanges. In summary, the changes to the individual and small-group market appear to be designed to make that market function as if all of the individuals who bought insurance in each exchange were the members of a very large single employment group with many choices for health benefits, analogous in many ways to the Federal Employee Health Benefit Program (FEHBP). 65 One very important difference is that purchasers of individual coverage on the exchange will pay the full price themselves, using after-tax dollars (subject to the subsidies). As with cafeteria plans in the large-group market, there is a potential for risk classification by design. Indeed, because of the very large number of options available on the exchange, some degree of risk classification by design seems inescapable, notwithstanding the risk adjustments and other regulatory tools that I will discuss in Part III. 63 See id. 1311(e)(1), 42 U.S.C.A (e)(1) ( An Exchange may certify a health plan as a qualified health plan if... such plan meets the requirements for certification as promulgated by the Secretary... and... the Exchange determines that making available such health plan... is in the interests of qualified individuals and qualified employers.... ). 64 The Act directs the states to administer the risk adjustment process. Id. 1343(a), 42 U.S.C.A (a). I predict that the states will assign the task to the exchanges for efficiency reasons, though it is possible that the task will be carried out by the state insurance regulator (though almost certainly in close cooperation with the exchange). 65 Extensive information about the FEHBP can be found at the website maintained by the U.S. Office of Personnel Management. Federal Employees Health Benefit Program, U.S. OFFICE PERSONNEL MGMT., (last visited Mar. 15, 2011); see also Stuart M. Butler & Robert E. Moffit, The FEHBP as a Model for a New Medicare Program, HEALTH AFF., Winter 1995, at 47, (explaining that FEHBP enrollees can choose from a variety of health plans, ranging from traditional fee-for-service plans, to insurance plans sponsored by employee organizations or unions, to managed care plan ); Harry P. Cain II, Moving Medicare to the FEHBP Model, or How to Make an Elephant Fly, HEALTH AFF., July Aug. 1999, at 25, 35 (comparing the FEHBP to Medicare and arguing that the FEHBP has outperformed Medicare every which way in containment of costs both to consumers and to the government, in benefit and product innovation and modernization, and in customer satisfaction ). But see Alain C. Enthoven, Effective Management of Competition in the FEHBP, HEALTH AFF., Fall 1989, at 33, 34 (arguing that because of adverse selection problems, in the 1980s some FEHBP plans... gain[ed] or los[t] market share not because they [were] more or less efficient, but because they... attracted a less or more costly clientele ).

17 1592 University of Pennsylvania Law Review [Vol. 159: 1577 D. The Large-Group Market The Act makes few changes to the large-group market, consistent with the belief that the market has been functioning acceptably well in providing health care access to most people working for large organizations. 66 The large-group market is and will remain lightly regulated by the Department of Labor under the ERISA and HIPAA statutes. 67 The main change introduced by the Act is that large employers defined as an entity with more than 100 employees must provide minimum essential coverage to their employees starting in For large employers that already provide health care benefits (most already do), the new mandate will not impose much in the way of new obligations because perhaps surprisingly the Act exempts the large-group market from the essential health benefits requirements that will apply in the individual and small-group market. 69 Largegroup market plans do, however, have to meet the same annual costsharing limits as health plans in the small-group market, 70 meaning that employees out-of-pocket expenditures for covered health care expenses cannot exceed the maximum amount allowed for Health Savings Accounts 71 and no more than $4000 of this cost sharing may be in the form of a deductible. 72 In addition, large-group market plans will have to comply with some of the Affordable Care Act mandates such as the elimination of annual and aggregate limits on coverage, 73 coverage 66 See Address Before a Joint Session of the Congress on Health Care Reform, 2009 DAILY COMP. PRES. DOC. 693, at 3 (Sept. 9, 2009) ( [I]f you are among the hundreds of millions of Americans who already have health insurance through your job or Medicare or Medicaid or the VA, nothing in this plan will require you or your employer to change the coverage or the doctor you have. ). But see Amy B. Monahan & Daniel Schwarcz, Will Employers Undermine Health Care Reform by Dumping Sick Employees?, 97 VA. L. REV. 125, (suggesting that current regulation of the large-group market may fail to prevent employers from engaging in risk classification and dumping high-risk employees). 67 See Monahan & Schwarcz, supra note 66, at (summarizing pre- and post- Affordable Care Act large-group regulation). 68 See sources cited supra note 37; see also PPACA 1411(e)(4)(B)(iii), (f)(2)(a), 42 U.S.C.A (e)(4)(B)(iii), (f)(2)(a) (outlining procedure for notifying an employer when the employer does not provide minimum essential coverage and may be liable for employees health care subsidies as well as procedure for appeal of such determinations). 69 Id. sec. 1201(4), 2707(a), 42 U.S.C.A. 300gg-6(a) (West Supp. 1A 2010). 70 See id., 2707(b), 42 U.S.C.A. 300gg-6 (subjecting a group health plan to the cost-sharing limits set forth in PPACA 1302(c)). 71 Id. 1302(c)(1), 42 U.S.C.A (c)(1) (West Supp. 1B 2010). 72 Id. 1302(c)(2)(A)(ii), 42 U.S.C.A (c)(2)(A)(ii). For plans that cover a single individual, the limit is $2000. Id. 1302(c)(2)(A)(i), 42 U.S.C.A (c)(2)(A)(i). 73 Id. secs. 1001(5), 10101(a), 2711, 42 U.S.C.A. 300gg-11 (West Supp. 1A 2010).

18 2011] Health Insurance, Risk, and Responsibility 1593 for preventive services, 74 dependent coverage, 75 wellness programs, 76 nondiscrimination on the basis of health status, 77 and reporting. 78 The Act also regulates the content of large-group market plans indirectly. If an employer s plans are of such low quality that employees start to buy individual health plans on the exchanges, the employer will be penalized. 79 In addition, states will have the option of giving large employers the choice to include plans offered through the exchanges as part of their employer-sponsored plan, allowing employees to use pretax dollars to buy health plans on the exchange. 80 Large employers that are not very large are likely to encourage states to make that option available. II. DISTRIBUTING RISK AND RESPONSIBILITY AFTER THE AFFORDABLE CARE ACT After the Affordable Care Act takes full effect, the health care costs of the U.S. population will be distributed as follows. 81 Most health care costs associated with old age and total disability apart from long-term care will be distributed through the Medicare 74 Id. sec. 1001(5), 2713, 42 U.S.C.A. 300gg HCERA sec. 2301(b), PPACA sec. 1001(5), 12714, 42 U.S.C.A. 300gg PPACA sec. 1204, 2705(j), 42 U.S.C.A. 300gg-4(j). 77 Id., 2705(a), 42 U.S.C.A. 300gg-4(a). 78 Id. sec. 1001(5), 2717, 42 U.S.C.A. 300gg HCERA sec. 1003(d), 1513(a), 10106(e), 26 U.S.C.A. 4980H(b). Amy Monahan and Daniel Schwarcz argue that this penalty may not be enough to induce employers to design plans that will be sufficiently appealing to high-risk workers, raising the possibility that employers will dump such workers on to the exchanges. See Monahan & Schwarcz, supra note 66, at (providing a road map for an employer that was considering such an approach). But, read carefully, their article contains a regulatory solution that is within the discretion of the Secretary of Health and Human Services to implement. Id. at See PPACA 1312(f)(2)(B), 42 U.S.C.A (f)(2)(B) (West Supp. 1B 2010) (allowing such an option starting in 2017). 81 This discussion focuses on explicit health risk distribution mechanisms, omitting the health care financing provided through government-supported research, health construction and equipment, public health measures, and nonreimbursed state and local hospital expenditures. As calculated by the Office of the Actuary of the U.S. Centers for Medicare and Medicaid Services, expenditures in these omitted categories totaled about 7% of national health expenditures. See U.S. CENSUS BUREAU, STATIS- TICAL ABSTRACT OF THE UNITED STATES: 2010, at 98 tbl.128 (129th ed. 2009) (reporting $146.2 billion of $2.24 trillion in national health expenditures in 2007). This discussion also omits the health care costs of military families and veterans. These costs are distributed through general federal taxes. In 2007, Defense Department health benefits were $31.7 billion, and Veterans health benefits were $33.8 billion. Id.

19 1594 University of Pennsylvania Law Review [Vol. 159: 1577 program, as they are now. 82 Medicare is available to all lawfully present and working Americans and is financed through a flat-percentage tax on wages paid over an individual s lifetime and through some incomebased premiums paid while eligible for Medicare. 83 Medicare beneficiaries have cost-sharing obligations at the point of service that vary according to the kind of service; the most significant of these obligations are capped at a new, lower level by the Act. 84 Most health care costs for the lowest income earners will continue to be distributed through the Medicaid program, but Medicaid s deserving poor categories will become less important. 85 Medicaid is financed through general revenues, principally from the federal government but also from state governments. 86 Health care cost risks attributable to employment occupational injury and illness will be largely distributed through the mandatory, state-based workers compensation system, as they are now. 87 Workers compensation health benefits are entirely paid for by employers through risk-based premiums (or self-insurance arrangements), but this cost is commonly understood to be borne in all or large part by employees in the form of foregone wages. 88 Assuming the Affordable Care Act 82 In 2007, Medicare expenditures were $431.2 billion of the $2.24 trillion in national health expenditures, as calculated by the U.S. Centers for Medicare and Medicaid Services. Id. 83 See I.R.C. 3101, 3111 (2006) (setting FICA tax rates for employees and employers respectively); 42 U.S.C. 402, 414(a), 1395c, 1395j, 1395o, 1395r, 1395w-21, 1395w-101 (2006) (setting guidelines for Medicare). 84 See HCERA 1101, 42 U.S.C.A. 1395w-102. This discussion does not address Medigap insurance, a form of private insurance regulated by the federal government that provides benefits supplemental to Medicare. See generally What Are Medigap Basic Benefits?, MEDICARE.GOV, more-about-medigap-basic-benefits.aspx (last visited Mar. 15, 2011) (listing the basic benefits of each Medigap plan). 85 In 2007, Medicaid and related expenditures were $334.7 billion of the $2.24 trillion in National Health Expenditures as calculated by the U.S. Centers for Medicare and Medicaid Services. See U.S. CENSUS BUREAU, supra note 81, at 98 tbl.128. Because of the expansion of Medicaid, that number will grow much more rapidly in the short term than will Medicare. It is worth noting that a very large percentage of Americans are at risk of having a low income at some point in their lives. Accordingly, it would be wrong to understand Medicaid as a program that primarily benefits a readily identifiable underclass. 86 See Lawrence D. Brown & Michael S. Sparer, Poor Program s Progress: The Unanticipated Politics of Medicaid Policy, HEALTH AFF., Jan. Feb. 2003, at 31, ARTHUR LARSON & LEX K. LARSON, LARSON S WORKERS COMPENSATION LAW 1.01 (2010). 88 See W. Kip Viscusi & Michael J. Moore, Workers Compensation: Wage Effects, Benefit Inadequacies, and the Value of Health Losses, 69 REV. ECON. & STAT. 249, 249 (1987) (not-

20 2011] Health Insurance, Risk, and Responsibility 1595 succeeds, workers compensation health benefits may be merged over time into the general employment-based health benefit system. 89 Other current health care cost risks of families with one or more members working for large employers will be distributed through the large-group market, as they are now, but without giving employers the choice to opt out. 90 In this market, all of the individual members of a group will pay the same premiums (subject to wellness rebates and risk classification by design), but the prices charged to each group will be based on the projected health care costs of that group; this means that there will be limited risk distribution among groups, especially very large groups. 91 This is the same as at present. Individuals will have cost-sharing obligations at the point of service, which the Act will cap. 92 The current health care risks of all other individuals lawfully resident 93 in the United States will be distributed through state-based exchanges that attempt to combine all participants into a single risk pool in each state. Premiums will vary according to income, the type of plan selected, the application of the four permitted pricing factors (age, geography, family, and tobacco use), and, potentially, the wellness programs permitted in the small-group market. 94 Individuals will ing research showing that workers are willing to trade off additional wage compensation for higher workers compensation benefits ). 89 Indeed, allowing employers to satisfy their obligation to provide workers compensation health benefits by providing general employment-based health benefits could be a state-level incentive that encourages small employers to offer such benefits. Such a measure is likely to be very politically popular in light of (a) the increasing recognition within the business community that workers compensation has become an expensive form of health insurance and (b) the obvious efficiencies from eliminating the need to determine whether an injury or illness is caused by employment. In 2007, workers compensation health payments were $32.4 billion of the $2.24 trillion in national health expenditures, as calculated by the U.S. Centers for Medicare and Medicaid Services. U.S. CENSUS BUREAU, supra note 81, at 98 tbl PPACA 1513(a), 26 U.S.C.A. 4980H(a)(1) (West Supp. 1A 2010); see also supra notes 37, 68 (discussing the requirement that large employers provide minimum essential coverage ). 91 Monahan & Schwarcz, supra note 66, at 151 ( ACA largely excludes employers... from... risk-sharing arrangements.... ). 92 See PPACA 1302(a)(2), (c)(2)(a)(ii), 42 U.S.C.A (a)(2), (c)(2)(a)(ii) (West Supp. 1B 2010) (capping annual deductibles for plans not covering single individuals at $4000). 93 The health care cost risks of individuals who are not lawful residents of the United States will not be distributed through any of these mechanisms. While this is a very important topic, it is part of a larger discussion about the increasingly punitive approach to illegal immigration that is beyond the scope of this Article. 94 Id. sec. 1201(4), 2704(a), 42 U.S.C.A. 300gg(a) (West Supp. 1A 2010).

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